CONCORD – Promoting the use of gold and silver by state government would trigger a flood of investment in New Hampshire, according to supporters who want a bill to proscribe their future uses. Rep. Henry McElroy, R-Nashua, donned an Uncle Sam hat at a news conference Monday to urge lawmakers keep alive his bill that would make New Hampshire the first to endorse the use of gold and silver as legal tender for state government. “This is nothing new to this country,” he said. “It’s what we were founded upon.” Dr. Edwin Vieira is a constitutional lawyer from Virginia who helped McElroy, Rep. David Buhlman, R-Hudson, and others prepare the bill. “Paper currency in this country has lost its purchasing power since World War II. Precious metals have retained their purchasing power. This will stimulate investment in New Hampshire if you take this important first step,’’ Vieira said.But the House Commerce Committee found little support for the change due to the strain it would place on the state treasurer’s office and the private banking system, said Rep. Leo Fraser, R-Pittsfield. “The committee was having trouble believing that gold, which also may be devalued as a currency, would be of any benefit,’’ Fraser said.

State Treasurer Michael Ablowich said as a courtesy he assisted lawmakers in trying to refine the bill (HB 1342), but he also saw many flaws in it. “Like 90 percent of the Legislature, I’m fairly skeptical about how it might work,’’ he said. The federal government began getting off the gold standard in 1933 and in 1971 discontinued all purchase of gold or silver to back up Federal Reserve notes stored in the U.S. Mint. Rep. Dan Itse, R-Fremont, said this has led to more inflation in the economy and a devaluing of the dollar here and abroad. “Even today, we have low inflation now, but the common bank savings account interest rate is lower than the inflation rate. That is the definition of an unstable economy,’’ Itse said. Federal Reserve Chairman Alan Greenspan has praised the stability of the U.S. economy when gold backed its currency. Any federal conversion would require the government to purchase huge stockpiles of the precious metal, Greenspan said. If the government estimated the price of gold it was to buy as too low, Greenspan has warned taxes would have to be raised to keep government operating. Edward Lee of Merrimack, who owns his own gold and silver depository, insists state government costs under this bill to allow gold and silver as an optional choice would not be significant. To cover costs, Lee said the state could mark up the price and charge a handling fee for those who would want to be paid in gold or silver. “There would be a small investment to get things going and the state could be profitable in a period of months,’’ Lee said.

Update on the Sound Money Bill, Revised New Hampshire HB 1342. (It will have another number in the 2004 / 2005 New Hampshire Legislative Session which is our Phase II.) A Sound Money Bill related Informational Hearing is scheduled for Monday,
May 10, 2004, at 10 AM in the Commerce Committee Room 302 in the LOB in Concord, New Hampshire. Mark your calendars and invite other interested parties.

We also have DVD and Video copies of February’s Sound Money Bill press conference available. This press conference introduced the Sound Money Bill. These informative video copies are ready for purchasing and shipment. Purchasing these videos helps defray our actual Phase I and projected Phase II costs which will position us well for Phase III.

Requests have been made for, among other things, a reporting of the detailed financial costs we experienced in Phase I and for the projected funding we see needing to be in place to cover the costs for Phase II and positioning us to move forward with Phase III. Phase II is designed to achieve passage of the Sound Money Bill in New Hampshire. Phase II will also recover our costs for the Phase I efforts. Phase II will also raise funds to cover the projected costs for Phase II. Additionally Phase II will position us for Phase III which will support our teams in the achievement of having Sound Money utilized in other states across the Nation. The requests for the Phase I, Phase II, and Phase III actual and projected needed financial support is presented below and where to send donations.

SOUND MONEY BILL INFORMATIONAL HEARING SCHEDULED

On Monday, May 10, 2004 at 10 AM in the Commerce Committee Room 302 in the LOB in Concord, New Hampshire there will be an Informational Hearing related to the use of Constitutional money (Gold and Silver, Sound Money). This Informational Hearing will present the reasons why New Hampshire will benefit from using gold and silver as a form of currency in parallel to dollars (Federal Reserve Notes). Both the legal and economic rationale for again adopting use of Sound Money will be identified in this educational forum along with an overview on the practical aspects of once again using Gold and Silver as currency. Our primary expert speaker will be Mr. James Turk, former banker (Chase Manhattan) and currently an Internationally known Gold and Precious Metals consultant.

Reps. Henry McElroy, John Hunt, Dave Buhlman and Dan Itse will be conducting this meeting. It is open to the public. Invite other as many other interested parties as possible.

VIDEO COPIES OF SOUND MONEY BILL PRESS CONFERENCE

We also now have DVD and Video Tape copies of the Sound Money press conference that was held on February 2nd, 2004, at the Legislative Office Building in Concord, NH. Presenters at the press conference were our team of experts Dr. Edwin Vieira, James Turk, Ed Lee, Dianne Gilbert, and U.S. Representative Ron Paul (Representative Paul was present later via telephone for questions
and support. He also wrote a letter of support.) Others present included the bill sponsor Henry McElroy and co-sponsors Dave Buhlman and Dan Itse. The DVD and Video tape copy of the press conference gives an excellent overview of Revised HB 1342 and the use of Sound Money as part of our monetary system. The press conference is a good lead into the Sound Money Bill which will be reintroduced in the 2004 / 2005 Legislative Session. The video is available on DVD and other video tape formats (S-VHS and regular VHS) for a $35 donation each with donation discounts for multiple copies. We encourage you to order copies for yourself and for others in order to become familiar with the importance of Revised HB 1342. It is suggested that some of the extra copies be given to other legislators both here in New Hampshire and in other states. Please help us by purchasing some of these videos.

COSTS, FUNDRAISING AND DONATIONS

Related to costs, we are doing fund raising via 1) Donations of any amount you and your networks can afford and 2) Each DVD or Video purchase will also assist in A) defraying prior costs and B) aid with fundraising to support the extensive efforts that will be required in Phase II to pass the Sound Money Legislation while positioning us for Phase III implementations. Let’s get this information into as many people’s hands as possible AND AS QUICKLY AS POSSIBLE. Also do not forget the importance of resources from many people will make the difference for this fund raising effort. For Phase I we still have $1,330 outstanding for our February 2004 efforts for items like Conference Room Rental, Telephones, Bumper Stickers, chocolate candy Gold Coin promotion, Video Editing, Video Production, and Video Medium. These expenses were fronted by many people out of their own pockets.

AND for Phase II we expect that another $10,000 to $15,000 may be needed. See the donations contact information and address at the end of this communication for more details. We have been advised not to be too frugal in our estimates of our planning. Assist us in determining this.

THEREFORE, WE ENCOURAGE YOU AND THOSE IN YOUR NETWORKS TO PLEASE MAKE GENEROUS DONATIONS TO ASSIST WITH THE ACHIEVEMENT OF OUR SOUND MONEY GOALS ACROSS THE COUNTRY. TIMING IS CRITICAL FOR INFORMATION DISSEMINATION AND FUND RAISING !

We encourage your networks and you to send what you can today. ANY AMOUNT, ANY LEGAL TENDER CURRENCY. Thank You !

– Brief Summary Of Amended New Hampshire HOUSE BILL 1342

Amended House Bill 1342, AND its follow-on bill in the 2004 / 2005 Legislative Session, enables an existing ability that is allowed by

ALL Federal Statutes and encouraged by our Constitution’s Rule Of Law. 1342’s follow-on will encourage financial transactions, involving the State, our citizens, and our businesses to be able to be transacted using both Federal Reserve Notes (dollars) and/or U.S. minted Gold and Silver. 1342 gives New Hampshire the voluntary choice to use U.S. minted Gold and Silver in the State’s daily payable and receivable transactions.

MONETARY SYSTEM INSURANCE AGAINST A DEVALUED DOLLAR

The use of Gold and Silver again is a monetary system insurance policy. The use of Gold and Silver again in addition to dollars (FRNs) will help keep the State of New Hampshire secure in it’s monetary system should the value of the dollar plummet below financially acceptable levels around the world. AND this use of Gold and Silver is voluntary !

IMPORTANT NOTE Related To The Original Version of 1342 On The NH Website

The version of HB 1342 on the New Hampshire government website is the original bill BEFORE it was amended. Originally 1342 proposed that New Hampshire reopen it’s own mint for coinage of Gold / Silver. However, there were many potential conflicts with the U.S. Constitution and it was decided to monetarily and constitutionally strengthen 1342. 1342 was rewritten with the assistance of the eminently qualified Constitutional Lawyer and monetary expert, Dr. Edwin Vieira, Jr., of Virginia who is also no stranger to New Hampshire. If you’d like a copy of the amended 1342 that you can share with your own State legislators, call or e-mail either Rep. Henry McElroy or Harvey Wharfield.

Why Support The Sound Money Bill ?

Passage of the Sound Money Bill will mean we once again begin to use Gold and Silver AS PART OF OUR MONETARY SYSTEM In New Hampshire (Phase II) and, ultimately, across the other States united (Phase III). Using Sound Money as part of our monetary system will ensure the stability of our monetary system. Sound Money will ensure us against the potential and inherent weaknesses of our Federal Reserve dollars, or any monetary system that is NOT backed by anything with intrinsic value and especially when your monetary system is based on a strategy of Monetization Of Public Debt.

This all means our PHASE II passage effort has to be given some clout !Our experience shows that passage of a Bill with the magnitude of 1342 is well worth the expense to get it passed. In this New Century, the use of Sound Money will have a much needed positive economic benefit for each and every American Inhabitant. The economies and commodity markets around the world will likewise realize positive, stable, wide spread, and long lasting economic benefits for every Being/Inhabitant of the World. Many of these economic benefits are already realized in commodity markets that transact business primarily in Gold and Silver. Security, respect and stability of many monetary systems world wide will be realized and recognized. With these economic and monetary benefits that are to be realized for our State, Nation, and the World please assist us in acquiring the necessary funding required to get the Sound Money Bill passed in PHASE II (New Hampshire) and position us for PHASE III (the remaining 49 States).

Do not think of getting Sound Money passed as being EXPENSIVE. Think of it as very necessary and a very responsible and a minimal thing to do. Achieving Sound Money in New Hampshire (Phase II) will secure and stabilize both our own monetary system and those of other states (Phase III) and countries around the world. Monetarily the world’s monetary systems, as you know, are intertwined with each other. Therefore, passage of our Sound Money Bill here in New Hampshire (Phase II) will be received as having a positive, stabilizing effect on monetary systems around the world by the entire international banking, political, secular, and business communities. Indications from PHASE I have already shown this to be true.

To pass this Sound Money Bill in PHASE II (New Hampshire) and continuing in PHASE III to support passage of Gold / Silver Sound Money beyond New Hampshire also means we will need contributions from a broad spectrum of people ! – Needed Resources For Phases II And III . An office, with modest staff, telephones, computers, marketing, and supplies to coordinate and achieve this entire PHASE II effort has been determined by our Phase I experience to be crucial for our success of implementing Sound Money. Having this support set up is crucial to our timely success of PHASE II in New Hampshire. Our Phase II will also be instrumental in positioning us for PHASE III and the Sound Money successes across the country. An educational and promotional website, etc., also needs to be set up NOW ! Other media and communications outlets are equally important for this Sound Money Campaign.

You can even do it electronically by using the www.GoldMoney.com website. “The safest and easiest way to own and use Gold !”
Accounts are easy to set up and are FREE ! Set up a FREE gold gram account for yourself, purchase some gold grams for yourself and send your desired donation to the “Sound Money Bill” gold gram account # 51-23-20-V . We’ll list all donations and where the money goes !

Thank you Mr. Chairman. Welcome Chairman Greenspan. I want to call attention to the committee that I certainly was pleased that you brought up the subject of deficits because deficits obviously do cause a problem. And you mentioned that deficits usually cause interest rates to go up. But, I also would like to suggest that deficits alone are not the problem because whether you borrow the money or tax the money out of the economy, it still puts pressure on the capital markets. So, deficits alone are not the problem. Big government, big spending – the amount that we spend here that really really counts.

But, you said that deficits could – future expectations of deficits could raise interest rates and I certainly would agree with that. But, we all must remember that future expectations of the inflation rate and future expectations of the value of the dollar also can raise interest rates. Those are monetary policy causes and therefore the pressure or the emphasis or the blame for high interest rates that will come can’t be put on the deficit alone and has to be put on those who manage monetary policy.Also, you warned on page seven that the printing presses won’t run indefinitely. You use the word indefinitely and that’s good. Because if they do run this fast indefinitely, will all know what will and can happen. So that’s good that eventually you will turn the printing presses off. But, for now you said we can be patient and that means we’ll just let the money flow and see what happens. Which I think is a risky proposition. But, you mentioned the condition of protectionism. You’re worried about protectionism, which I think is characteristic of all societies that destroy their currency. Especially when you have fluctuating fiat currencies, people yield to the temptations of protectionism. But, once again, there are different ways of bringing about protectionism. There are the tariffs. But, there’s also the competitive devaluations in the exchange rate of the dollar which is a reflection of monetary policy. But, my question is related a little bit to the wording of ‘indefinitely’ and ‘being patient’ because they’re arbitrary. They’re subjective and in January, your report, FOMC report, omitted two words; two words that were subjective and that was ‘considerable period.’ I find that very interesting and also very alarming, the amount of clout, the amount of power that we as a nation, that we as a committee have allowed to get into the hands of one or two individuals, or a committee. From the time the market was up to the release of that report the stock market lost $250,000,000 as a reflection of the concern about the dropping of two words.

Frederick Hayek was fond of saying that the managed economy was in danger because it was based on a pretense of knowledge that certain things the economic planners don’t know. And, for instance, he would agree with me that we don’t know, you don’t know, the Congress doesn’t know what the overnight rates ought to be and that we reject the marketplace. But, its part of the system and I understand that. But, doesn’t it ever occur to you that maybe there’s too much power in the hands of those who control monetary policy? The power to create the financial bubbles. The power to maybe bring the bubble about. The power to change the value of the stock market within minutes. That to me is just an ominous power and challenges the whole concept of freedom and liberty and sound money.

Alan Greenspan:

Congressman, as I’ve said to you before, the problem you are eluding to is called the conversion of a commodity standard to fiat money. We have statutorily gone onto a fiat money standard and as a consequence of that it is inevitable that the authority, which is the producer of the money supply, will have inordinate power. This is one of the reasons why I’ve indicated, because of that and because of the fact that we are unelected officials, it is mandatory that we be as transparent as we conceivably can and remember that we are accountable to the electorate and to the Congress. And the power that we have is all granted by you. We don’t have any capability whatsoever to do anything without the agreement or even the acquiescence of the Congress of the United States. We recognize that and one of the reasons I’m here today is to endeavor to convey why we are doing what we are doing, and I will continue to do that and I’m sure that all of my colleagues are fully aware of the responsibility that Congress has given us. I trust that we adhere to the principles of the Constitution of the United States more so than one would ordinarily do.

They are yesterday’s heroes. Central banks ruled the world during some 22 years of disinflation. But like most champions, they have overstayed their welcome. The world’s major central banks — the Federal Reserve, the Bank of Japan, and the European Central Bank — have squandered the capital they built up in the long and arduous war against inflation. And now, with their policy arsenals dangerously depleted, they are woefully ill-equipped to cope with the ever-daunting complexities of a post-inflation era. Bondholders beware: Your once-proud defenders have met their match. In my view, modern-day central banking is on the brink of systemic failure.

It all started, of course, with the Bank of Japan. Not only did the BOJ fail to address the perils of a major asset bubble in the late 1980s, but it also made a series of well-known policy blunders in belatedly coming to grips with the aftershocks of the post-bubble climate. Unfortunately, for Japan the impacts of its bubble had spread well beyond equity and property markets — not only infecting its financial system but also leading to a severe overhang of excess capacity in the real economy. While the BOJ hardly deserves all of the blame for the Japanese disease, the central bank certainly could have acted far more aggressively to deal with those problems than it did.

Sadly, with its policy interest rate at zero and the Japanese economy in a serious deflation, the BOJ is now saddled with the painful legacy of failure as a central bank. Its so-called zero-interest-rate-policy (ZIRP) is reflective of a monetary authority that has all but abdicated control over the real economy and financial system. Nor is the BOJ likely to change its stance on the heels of a 4Q04 GDP growth rate that we reckon hit 4.7%, the fastest increase in three years. If anything, Takehiro Sato of our Japan team believes that the Japanese central bank is now sending a signal that the ZIRP exit strategy has been pushed further out into the future (see his January 9, 2004 dispatch, Pragmatic BOJ: Toward Phase Two).

Alas, there’s far more to the BOJ’s post-bubble travails than the challenges of managing a dysfunctional Japanese economy. The central bank also had to come to grips with global pressures that are bearing down on the Japanese economy. In an effort to prevent a strengthening yen from exacerbating an already serious deflation, the BOJ has become the enabler in the Ministry of Finance’s massive program of currency intervention. And massive it is: The Japanese government’s supplementary budget for FY2003 provides for an additional ¥21 trillion (US$200 billion) funding to the MOF for currency intervention, following the previously approved ¥79 trillion (US$750 billion). Actual intervention in 2003 appears to have totaled US$184 billion — unprecedented in the annals of currency support operations.

In acting as an agent for the MOF and incorporating the currency dimension into its policy struggle, the BOJ has framed the central bank dilemma in a very different light. Long gone are the days when the monetary authority could afford the luxury of focusing on “closed” models of country-specific economic performance. Globalization — and the increasingly integrated and fast-moving flows of goods, services, and financial capital — demands “open” models of policy formulation. On that score, the BOJ is being pushed well out of its comfort zone to engage in the functional equivalent of unlimited currency intervention. Nor are the impacts of such policies without their own unintended consequences: To the extent currency intervention results in massive purchases of US Treasuries, that has the effect of reinforcing the Fed’s efforts to suppress American interest rates. That could well further exacerbate imbalances in the US economy and in the US-centric global economy.

The Fed, for its part, has gone out of its way to assure market participants that it has learned the lessons from the Japanese experience (see Alan Ahearne et al., Preventing Deflation: Lessons from Japan’s Experience in the 1990s, Federal Reserve International Financial Discussion Paper No. 729, June 2002). That remains to be seen, in my view. The US central bank has all but refused to modify its policy framework to cope with extreme fluctuations in asset markets. Chairman Alan Greenspan has led the debate, arguing instead that the monetary authority had best be prepared to deal with post-bubble damage containment rather than take preemptive actions to stave off speculative excesses (see Greenspan’s recent speech, Risk and Uncertainty in Monetary Policy, remarks presented at the meetings of the American Economic Association, San Diego, California, January 3, 2004).

The Fed’s approach in dealing with asset bubbles suffers from three serious shortcomings, in my view:

* First, it may only be a “one-bubble” success story. In a low inflation climate, aggressive post-bubble easing can take the policy rate down to exceedingly low levels. Witness today’s 1% federal funds rate — dangerously close to the zero nominal interest rate boundary. If the Fed is unable or unwilling to lift rates for any reason, then it will be lacking in the ammunition required to deal with subsequent post-bubble shakeouts or other deflationary shocks.

* Second, it creates a moral hazard dilemma. The fear of lingering post-bubble deflationary perils — a classic by-product of an asset bubble — can lock a central bank into a protracted monetary accommodation. It doesn’t take investors and speculators long to figure that out — especially with the Fed now back to its old tricks of wordsmanship (i.e., splitting hairs between “considerable period” and “patient” insofar as the duration of monetary accommodation is concerned). Persistently low nominal interest rates are a breeding ground for subsequent asset bubbles. Recent activity in property, bond, high-yield debt, credit markets — to say nothing of renewed froth in equity markets — hardly makes that idle conjecture.

* Third, it perpetuates the risks of an asset-driven economy. The lingering asymmetrical biases of post-bubble monetary policy accommodation and the surging asset markets such policies support, keep the US economy heavily dependent on wealth effects. That exacerbates the imbalances of reduced saving and increased indebtedness. Should the economy suffer from a shortfall of income generation — precisely the case with America’s jobless recovery — an asset-driven economy may be all the more vulnerable to the inevitable back-up in real interest rates that normally afflicts an unbalanced economy.

In other words, the jury is still out on America’s Federal Reserve. From where I sit, the evidence is not very comforting. Yet “Fed-spin” has shifted into high gear. The US monetary authority has gone overboard to convince financial markets it has learned the painful lessons of Japan. In the end, however, it may well be that the Fed and the BOJ have all too much in common.

The European Central Bank is now headed down the same slippery slope. But unlike the BOJ and the Fed, the ECB has not fallen victim to the perils of an asset bubble. Instead, it remains fixated on inflation targeting at precisely the time when Europe is actually facing deflationary risks. With structural reforms lagging, domestic demand weak, the currency on the rise, and inflation finally receding through the 2% threshold, the ECB can hardly afford to rule out a deflationary endgame. In that context, the last thing Europe needs is an intransigent central bank. That’s precisely the risk as the ECB refuses to flinch on its increasingly irrelevant inflation-targeting mandate.

Yet Europeans are remarkably blasé about the possibility of deflation. Such complacency is all the more worrisome in light of widespread deflationary pressures still evident elsewhere around the world. In this climate, and with future currency appreciation more likely than not, the ECB cannot afford to play the odds. Unfortunately, the European monetary authorities are digging in their heels at precisely the time when they should be more flexible. A stubborn ECB has all too much in common with its counterparts at the BOJ and the Fed.

All this spells a sad assessment of the state of central banking. History has long demonstrated that monetary policy is far better equipped to deal with the ravages of inflation than the perils of deflation. For that reason, alone, the record of central banking in recent years is all the more disturbing. Yet few seem concerned. In fact, with recovery in the global economy having finally gained some traction in the past couple of quarters, a new complacency is setting in. One central banker — namely Fed Chairman Alan Greenspan — has even had the audacity to claim vindication for a job well done (see his January 3, 2004 speech noted above). Hubris in this climate could end up being very regrettable, to say the least.

The toughest aspect of this conundrum is that there may well be no easy or painless way out. Mindful of lingering deflationary perils, central banks are continuing to err on the side of aggressive accommodation. In an exceedingly low inflationary climate, such accommodation spells exceedingly low policy interest rates — “zero” in the case of Japan, 1% for the US, and 2% for Europe. That leaves the authorities with precious little in the way of remaining ammunition to cope with any unexpected shocks. Meanwhile, the tensions of a lopsided global economy are being vented in currency markets in the form of a weaker dollar — triggering a realignment in relative prices that only puts greater pressure on Europe and Japan. To the extent that central banks counter those pressures through currency intervention, America’s interest rates would be held artificially low and the excesses of an asset-driven US economy would only mount. The Fed could well be trapped in a dilemma of its own making — unable to raise policy rates because of lingering deflation perils and without any ammunition to deploy in the event of another shock.

In retrospect, we probably asked too much of monetary policy. At its best, it is a very blunt instrument — well-equipped to deal with the excesses of inflationary expectations but ill-equipped to deal with the subtleties that come into play near the hallowed ground of price stability. That leaves central bank mandates hopelessly out of step with today’s deflation-prone global economy. Old-fashioned CPI-based inflation targeting simply doesn’t suffice if success in hitting such a target gives rise to a steady stream of asset bubbles, saving shortfalls, and external imbalances. At exceedingly low rates of inflation in goods and services, I believe central banks should abandon narrow CPI-based targets in favor of broader targets including asset prices. Unfortunately, that requires a flexibility that few central banks possess.

A systemic failure of monetary policy also raises the risk of a political backlash that could jeopardize the hard-won independence of central banking. In my view, politicians will not sit by idly if central banks repeatedly mismanage their economic mandates. A politicization of central banking cannot be ruled out if that turns out to be the case. Anti-inflation discipline would probably be the first thing to go in such a new regime. And that would be the last thing an over-bought bond market needs at the end of nearly a 22-year secular rally. Ironically, there are those now bemoaning the extinction of the bond-market vigilante (see “The Last Vigilante,” by PIMCO’s Bill Gross, February 2004). The downfall of central banking may yet give those grizzled old warriors a new lease on life.

Credit has to be given to Alan Greenspan, the Federal Reserve chairman.
He is the first head of a monetary authority who has not only managed to create a series of bubbles in the domestic economy but has also managed to create bubbles elsewhere – in the New Zealand and Australian dollars, emerging market debts, government bonds, commodities, emerging market equities and capital spending in China.

In fact, over the last 18 months, US monetary policies have boosted all asset classes. This is most unusual since it ought to be obvious that in the long run commodities and real estate inflation is incompatible with a bond bull market.

Mr Greenspan’s monetary tribulations mark an achievement no one else in the history of capitalism has accomplished. It is also one investors will never forget once this credit-driven, universal bubble bursts and it will fill entire chapters of financial history books with economic and financial horror stories.

We simply don’t know how the end game of the current speculative wave will be played out and when the bust will occur but a painful resolution of the current asset inflation and global imbalances is as certain as night follows day.

I used to believe that sometime in 2004 we would see the beginning of diverging trends in the performance of different asset classes, since bonds, commodities and real estate cannot continuously rally in concert.

After all, one characteristic of a strong secular bull market in one asset class is the simultaneous occurrence of a bear market in another. The commodities bull market of the 1970s was accompanied by a vicious bond bear market. The equities and bond bull markets of the early 1980s were accompanied by a persistent bear market in commodities and, in the 1990s, stocks of developed Western markets soared while Japan and emerging stock markets collapsed.

So, I was leaning towards the view that some assets would continue to increase in value in 2004 while others, such as bonds, would begin to fall by the wayside and enter longer-term bear markets. After further consideration, I am now increasingly concerned that sometime soon “everything” could begin to unravel. When interest rates rise, it is conceivable that bonds, stocks, commodities and real estate will all decline in value at the same time.

In the past I have had the tendency to dismiss the deflationist views of some reputed economists and strategists as unlikely. I now feel the current universal asset inflation and overheated Chinese economy will be followed by a serious bust and asset deflation, which will kill consumption in the US. The only question is when.

I’m at a loss as to when this bust will occur. But given the overbought condition of the US stock market, the extremely high bullish consensus (indicative of market tops in the past), the rising commodity markets and the tendency of markets to defeat central bankers who entertain the same erroneous beliefs that central planners under the socialist ideology had when they thought they could plan the best possible economic outcomes, the bust could come sooner rather than later.

Moreover, we know from the experience of Japan in the late 1980s and Hong Kong in the mid-1990s that consumption booms, driven by asset inflation, end with a colossal bust. That can result from rising interest rates, or because stagnating household incomes no longer support the asset bubble as affordability diminishes, or additional supplies coming to the market and exceeding demand.So, given that consumption driven by asset inflation is unsustainable in the long run and always ends badly, what should the contrarian investor do?

The least desirable asset in the world is US dollar cash. The investment community can take everything in stride – even a 70 per cent decline in Nasdaq stocks. But interest rates, as low as they are now, compel people to speculate on everything from commodities, homes and bonds to equities.

Therefore, investors in the current speculative environment should be extremely defensive and not be tempted by short-term gains, which could be swiftly erased. Daily moves of 5 per cent in investment markets will become common. Nickel recently fell 8 per cent in a day, copper by 5 per cent, and the euro by 5 per cent within a week. Gold and, especially, silver may offer some protection but, once the current asset inflation bubble ends, they could also be in for a rough time.

Obviously, as I experienced in Asia in the 1990s, it wasn’t important to be “asset-rich” before the crisis of 1997 but to be “cash-rich” after the crisis when financial asset values had tumbled by 90 per cent and when incredible bargains across all asset classes were available. The author is editor and publisher of ‘The Gloom, Boom & Doom Report’ and author of Tomorrow’s Gold